January 1st of 2019 marks the start of another crude oil production cut by OPEC and non-OPEC oil producing nations. An agreement was made and announced in Early December to reduce production by 1.2 million barrels per day (bpd) in order to “stabilize” rapidly falling crude prices. WTI crude futures fell almost 45% from early October to their recent lows on December 24th and OPEC and its allies were determined to stop the selloff. It’s interesting to note that 11% of the fall in the price mentioned above happened after the production cut announcement on December 7th. Clearly, the cut wasn’t going to be enough short-term.
Since the lows on Christmas Eve, however, WTI crude has rallied over 10%. Part of that rally has to do with a WSJ article revealing that Saudi Arabia is looking to drive Brent Crude prices back up to the mid-$80 range. According to the article they intend to make a big splash in January, preparing deeper production cuts than required as part of the OPEC+ agreement. People forget that compliance during the last production cut averaged 116% of promised cuts and most of that was done by the Saudi’s. There is also evidence of a potential slowdown in U.S. shale production. The rate of hydraulic fracturing began to decline in the last four months of 2018. According to Rystad Energy, the average number of fracking jobs declined to 44 per day in November 2018, down from an average of between 48 and 50 for the five-month period between April and August 2018. Rystad Energy’s research fit well with that of the Dallas Fed, which reported last week that drilling activity began to slow in the Permian Basin in Texas in the fourth quarter. Shale tends to slow with falling prices, so this is not a surprise, but if demand picks up at all, prices may spike and more quickly than the market is expecting. Maybe not a rush to $80, but high $60’s/low $70s could be in the cards by late February.